[Lee Chang-yong Administration Bank of Korea] In the Era of Ultra-Tightening, Lee Chang-yong's Leadership Put to the Test

Marking 200 Days in Office While Continuing Communication Efforts

[Asia Economy Reporter Seo So-jung] October 12, Bank of Korea Monetary Policy Committee meeting room. When reporters suddenly asked, "You are tall, so do you have a long stride?" Governor Lee Chang-yong answered "Yes" with a faint smile. At that moment, laughter broke out in the press conference room, which had been filled with tense tension. This perfectly reflected Governor Lee's style of expressing his anguish with wit.

Governor Lee, who took office on April 21 and will mark his 200th day in office on the 6th, is the governor who implemented the largest interest rate hike in the shortest period in the history of the Bank of Korea. He is also the first governor in the Bank of Korea's history to take a big step (a 0.50 percentage point increase in the base interest rate). Since taking office, he has raised the base interest rate by 1.50 percentage points at once, reopening the '3% interest rate era' for the first time in 10 years. But it doesn't end there. As the U.S. Federal Reserve (Fed) hinted at prolonged tightening following four consecutive giant steps (0.75 percentage point increases) at the November Federal Open Market Committee (FOMC), Governor Lee is also weighing a third big step.

◆Direct Speech and Strong Aftershocks= "Since the 1997 foreign exchange crisis and the 2008 financial crisis, the central bank has never been this much in the spotlight." A senior official at the Bank of Korea recently described the current situation at the Bank of Korea this way. Along with the Fed's high-intensity tightening, every move of the central bank is attracting the public's attention. In particular, Governor Lee has been at the center of attention since his inauguration due to his bold experiments and active communication.

Above all, 'forward guidance' is at the peak of controversy. Right after the Bank of Korea took the first-ever big step in July, Governor Lee clearly stated, "If the domestic inflation trend does not deviate significantly from the current forecasted path, it is desirable to gradually raise interest rates by 0.25 percentage points for the time being." Market participants, who were accustomed to the communication style of former Governor Lee Ju-yeol, who had shown cautious language and attitude for the past eight years, were surprised. It was evaluated as a result of his diverse experiences and personal networks, including being a Seoul National University professor, Vice Chairman of the Financial Services Commission, Chief Economist at the Asian Development Bank (ADB), and Director for Asia and Pacific at the International Monetary Fund (IMF). It was also interpreted as reflecting an intention to mitigate the market shock from the first big step.

On the other hand, there was considerable criticism that the governor's confidence was 'excessive' without considering the weight of his position. Especially after the Fed raised its terminal rate ceiling at the September FOMC and the Korean won sharply depreciated, Governor Lee's forward guidance was harshly criticized for deepening the depreciation of the exchange rate and fueling market turmoil by raising expectations for an expanded interest rate inversion between Korea and the U.S.

Conscious of these aftershocks, the governor lamented at a lecture at the Peterson Institute for International Economics last month, saying, "It is true that there are many difficulties in communication aspects in realistically moving away from the long-standing practice of considering it a virtue to avoid mentioning future interest rate paths as much as possible." The market evaluated this speech, which revealed the governor's disappointment like a letter of reflection, as "confirming Governor Lee's willingness to actively communicate but also showing the trial-and-error case of how difficult it is to operate forward guidance in the foggy situation of rapid Fed rate hikes." While direct speech is good, advice was given that sometimes skills for market stabilization should also be developed.

[Image source=Yonhap News]

◆Continued Bold Experiments= Governor Lee, who worked at the International Monetary Fund (IMF) for eight years, is also bringing a breeze of change to the Bank of Korea's internal organization, which was criticized as 'Bank of Korea Temple (Han-eun-sa)' for being solemnly quiet. First, he introduced the IMF-style surveillance meeting called the 'Weekly Current Issues Forum,' where members openly share opinions on major economic issues, fostering internal competition. A Bank of Korea official said, "At first, it was an unfamiliar method, so people were taken aback, but now the staff have adapted well," adding, "In October, due to financial market instability, it was changed to the 'Financial and Foreign Exchange Market Risk Emergency Response Task Force,' but it will resume this month."

Governor Lee also proposed opening a Bank of Korea blog to strengthen communication with the market. At the Bank of Korea's 72nd anniversary ceremony in June, he delivered a fresh message, saying, "Let's create an organizational culture where we speak frankly without rank." He emphasized, "I will lead the effort to eliminate rigid hierarchies until the day when researchers can say at lunch, 'The governor's last speech was disappointing.'" He also said that internal reports that outsiders cannot know or find should not be produced, and a 'customer mindset' focused on demand should be adopted. As an external appointee for the first time in eight years, Governor Lee broke existing customs in his first personnel appointment in July by selecting talent based on IT expertise and capability. A Bank of Korea official said, "There was some criticism in the past that certain academic or regional ties were strong in personnel appointments, but going forward, lines will be gradually excluded, and bold appointments based on expertise can be made," adding, "Since the governor announced a personnel philosophy focused on expertise in the relevant field in July, this governor's style can be fully reflected in the regular personnel appointments in January next year."

◆This Month’s Monetary Policy Committee Leadership Test= "A great hard worker." Jo Yoon-je, a member of the Monetary Policy Committee who has had a relationship with Governor Lee for over 30 years since Lee was an assistant professor at the University of Rochester in the U.S., evaluated him this way. Although he is widely recognized as a macro and financial economics expert, this background is supported by his diligence in immediately finding the right person to solve any questions and his relentless efforts to resolve inquiries. It is rumored that Governor Lee's recent sleep time is only 3 to 4 hours.

He now faces his biggest test since taking office: the November Monetary Policy Committee meeting. Inflation rebounded after three months, the won-dollar exchange rate is soaring, and the Korea-U.S. interest rate gap has widened to 1 percentage point, making a big step necessary. However, funding shortages, debt, and growth (economic recession) are holding back, and opinions for a baby step (0.25 percentage point increase) are also strongly competing. This month's Monetary Policy Committee meeting is expected to be more fiercely debated than ever. After the second big step last month, two committee members already expressed minority opinions for a baby step, and this month, a 3-3 tie is possible, forcing the governor to hold the casting vote in an extreme situation that cannot be ruled out.